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Maintaining a positive cash flow is important when running a business. Whether your business offers a product or service, you probably need cash on hand to conduct your normal day-to-day operations. But what exactly is cash flow?

Cash Flow: The Basics

Cash flow can best be described as the difference in cash from when the beginning of a period to the end of that period. The beginning period is called the “opening balance,” whereas the end period is called the “closing balance.” If the closing balance is lower than the opening balance, the respective business has a negative cash flow for that period. If the closing balance is higher than opening balance, the business has a positive cash flow.

Cash Flow Statements

In accounting, a cash flow statement is a financial statement that reveals a business’s cash flow. Also known as a statement of cash flows, it’s used to show the short-term financial health of a business. Several third-party entities scrutinize the cash flow statements of businesses, some of which include lenders, creditors, investors and shareholders.

More specifically, a traditional cash flow statement should consist of three primary segments: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. Cash flow statements refer to the money coming into a business as “inflow,” whereas the money going out is referred to as “outflow.”

There are several methods used to create cash flow statements, the two most common being direct and indirect. The direct method involves reporting major classes of cash receipts and expenditures. The indirect method, on the other hand, involves the use of net-income as a beginning market, after which it adjusts for all non-cash transactions followed by an adjustment for cash-based transactions.

Goals of Cash Flow Analysis

In addition to cash flow statements, some businesses conduct a cash flow analysis to achieve similar accounting goals. The goals of a cash flow analysis is to determine the rate of return for a project; to determine liquidity problems; evaluate the quality of income generates by accrual accounting; and to evaluate the risks of a financial product.

Of course, Intuit’s Quickbooks accounting software makes cash flow statements a breeze. You can easily run a statement of cash flow reports by logging in to your Quickbooks account and selecting Reports > All Reports > Business Overview > Statement of Cash Flows.

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